With the eyes of the world on China during the Olympics, it is time to take a hard look at the China debate in the United States. It is troubling: the discussion is dominated by alarmist rhetoric and outdated ideas that risk driving both sides into a new cold war.

One of the most sensitive issues is China's military development, a fair cause for concern. But the question we must ask is not how to counter China's growing military, but how to engage it to ensure greater transparency, trust, and co-operation.

A world in which the US and Chinese militaries work together to confront common threats such as terrorism, nuclear proliferation, natural disasters and limited natural resources is far more secure than one in which suspicion and distrust drive us into an arms race or conflict.

Some conservative thinkers in the US advocate a 'return to deterrence' calling for 5.7 per cent of the US gross national product - US$800 billion - to be spent on military build-up each year.

This is unreasonable and dangerous. The US should not set aside billions of dollars to create a new enemy. We should spend only what is needed for national security, which should extend to include global engagement with the rest of the world, especially the Chinese and Islamic community. The nature of warfare is constantly evolving. The domestic debate about it in the US is not.

The level and kind of force required for opening a military competition with China will require an annual budget of at least US$500 billion.

This amount will only grow higher as China follows the example, pulling the US back into a new cold war it spent half a century getting out of. But there will be a significant difference: the next potential peer competitor will not try to match the US where it is most powerful, in the ability to conduct sustained conventional combat. It will focus on asymmetric counters, which the US will be slow to neutralise if it squanders vast sums on the systems and concepts of the past.

More nuclear weapons, supersonic aircraft, fast ships and long-range artillery are not effective when the battlefield is moving out of our skies and into the thoughts and minds of the young, networks that control our electricity, and the information technology and other systems that form the infrastructure of today's global economy. This is not to say that a reasonable number of these military platforms are not important, but they can no longer form the core of our future capability.

The history of US-Chinese military-to-military relations has not been easy. As a result, both sides are aware of the potential to slip into confrontation and have taken steps to prevent miscalculations, working within a framework of regular and reciprocal visits, consulting forums such as the Military Maritime Consultative talks, limited joint exercises and the effort to establish a hotline. But we must move beyond the cautious, symbolic gradualism of cold war 'confidence-building measures' to the type of meaningful collaboration that exists among great powers with a broad range of common strategic interests. This does not require formal alliances, but it begins with co-operating broadly on significant, tough issues.

One initial approach to allay mutual suspicion could be to establish a strategic military dialogue similar to the Sino-US Joint Commission on Commerce and Trade. This group originated from disagreements over how to measure the trade deficit - not unlike the row over how to measure China's military spending. A joint commission on defence spending could have similar effects.

Better still, why not focus US efforts on obtaining greater transparency on China's actual military capabilities rather than what it spends to get them? If that becomes the approach, then constructive engagement is the best way to obtain more insight to Chinese military capabilities, strategy, planning, and thought.

The US should consider offering China the kind of military personnel exchanges it has with other countries in military education, training, and exchange tours of duty. China might not accept, but until recently, the US has been reticent to engage.

China's military build-up and its intentions lack transparency, and that is a legitimate cause for concern. However, isolation and a new arms race in no way clarify our understanding or persuade the Chinese to disclose their intentions.

Developing trust and understanding is far more important than the US spending 5.7 per cent of GNP on the military.

It is for the benefit of every man and woman in uniform and the citizens they protect - on both sides of the Pacific - that the US and China lead our militaries to co-operate. We do not need to prepare for a new cold war - we need to prevent it.

William Owens served as vice-chairman of the Joint Chiefs of Staff and as commander of the 6th Fleet. He is currently the chairman and CEO of AEA Investors Asia and lives in Hong Kong